Moderate Growth Seen in Devices Sales; No Big Downturn for Equipment

MODERATE GROWTH SEEN IN DEVICES SALES; NO BIG DOWNTURN FOR EQUIPMENT

Industry Analysts Speak at SEMI Silicon Valley Lunch Forum

San Jose, Calif., September 9, 2005 -- Analysts speaking at the SEMI Silicon Valley Lunch Forum yesterday agreed on two points: Devices sales growth next year will be tepid, and the next downturn in equipment sales is expected to be relatively mild.

Doug Andrey, principle analyst for the Semiconductor Industry Association, forecasts a 6 percent rise in device sales this year to $226 billion. Growth for next year is expected to strengthen at 8.8 percent, with a double digit growth of 13.5 percent in 2008, when the industry is expected to hit the $300 billion sales mark. Andrey said growth is being driven by better-than-expected sales of PCs, cell phones and digital cameras.

Rising oil prices will have an impact on semiconductor sales, according to Andrey. He estimated the loss of U.S. device sales to be $8 billion per annum, and $23 billion worldwide. The figures were calculated by factoring in the estimated reduction in household discretionary income resulting from higher gas prices.

The good news, according to Andrey, was that inventory levels were now considered a “neutral factor” and that capacity utilization in fabs was in the 80 to 90 percent range.

Bill McClean, president of IC Insights, noted that the amplitude of the silicon cycles has moderated, but they are still a factor in the market. He sees “relatively moderate” device sales growth this year, and flat capital spending. Equipment spending will bounce back strongly in 2007-2008, according to IC Insights.

Mobile phones have become a major semiconductor driver, with unit shipments forecasted to be 800 million in 2005, and 1 billion annually by 2008. “This is the next big thing; it will be the next big thing five years from now,” said McClean.

McClean believes device makers now want to reduce their capital spending ratio to around 15 percent, down from 25 percent in the mid-1990s. Currently the ratio is about 19 to 21 percent. The result of the lower ratio will be a more balanced supply-demand situation leading to more moderate silicon cycles, he said.

The newfound caution among device makers will result in more moderate cycles going forward, agreed Dan Hutcheson, president and CEO of VLSI Research. “It is when we throw caution to the wind that we have the big cycles,” he said.

VLSI Research sees a flat year in 2006 for capital spending, with macro-economic factors inhibiting any chance of a strong increase. However, there could be a surprise upside if demand strengthens because of the tight capacity utilization rates. “If demand picks up, [device makers] have to buy more equipment,” he said.

The semiconductor materials market is forecasted to grow 7 percent in 2005, according to Lara Chamness, senior market analyst for SEMI. A concern is the shortage of polysilicon, the base material for semiconductor wafers. The projected shortage is primarily the result of a surge in demand for silicon solar cells, which use non-electronic grade silicon. The situation is exacerbated because polysilicon suppliers have been reluctant to invest in new capacity in recent years, given the inadequate returns on investment.

Chamness highlighted another trend in the market: By 2008, FPD materials are expected to account for 50 percent of all semiconductor materials, up from 46 percent in 2004. This shift is due to growing end use applications for FPDs and the trend towards larger panel sizes.

Klaus Dieter-Rinnen, managing vice president for semiconductor manufacturing at Gartner Dataquest, expects “solid but moderate growth” for semiconductors over the next five years. Gartner Dataquest forecasts capital equipment spending to decline by 5 percent this year and by about 6 percent in 2006.

In the short term, the economic impact of Hurricane Katrina has the potential to result in softer Christmas sales, Dieter-Rinnen said. However, longer term the reconstruction work to replace lost and damaged IT infrastructure could stimulate semiconductor sales.

Jan Vardaman, president of Techsearch International, said advanced packaging was taking an increasingly larger share of the overall IC package market. Unit sales of advanced packages were 18 billion in 2004 and are expected to reach 53 billion by 2009. The main driver is the wireless market, which requires leading edge IC packages. Flip chip packages are also enjoying strong growth, reaching 9 billion units in 2009, up from 3.3 billion units expected to be shipped this year.

Vardaman pointed out that the IC packaging materials market has undergone a supply disruption following a major fire at packaging contractor ASE in Taiwan in May this year. The result has been longer lead times and a firming of prices, which was a welcome sign for suppliers who have been operating on extremely thin margins.

Sherry Garber, senior vice president at Semico Research, was optimistic on the semiconductor device market in 2006, with growth being driven by “end product convergence and divergence”. In 2006, Semico believes that aggregate unit growth of traditional end market products – such as PCs, mobile phones and laptops – will be 17 percent vs. 40 percent for digital home products such as DVD recorders, video game consoles and MP3 players.

Carl Johnson, president of Infrastructure, pointed out that there was still a lot of old capacity in the market, with 64 percent of all fabs being 8-inch or less, and 40 percent of all devices manufactured on 6-inch or smaller diameter wafers. This provides a good opportunity for equipment service and spare parts suppliers, he said. While there is pricing pressure in most parts of the supply chain, Johnson sees a longer term trend for prices of specialty materials to go higher.